The not very successful premiere of Cyberpunk 2077, long-awaited for over eight years, cost the shareholders of CD Projekt dearly. On Wednesday, the closing price of the company’s shares reached PLN 269. This means that compared to the historic peak recorded at the beginning of December, it fell by over 42 percent.
How was it possible to earn from the collapse of CD Projekt’s course?
In just 3 weeks, the market value of the game developer decreased by almost PLN 20 billion. It turns out, however, that there were investors who, thanks to the image failure of Cyberpunk 2077 … achieved considerable profits. Only one of the hedge funds, which recently played the CD Projekt stock discount, earned about PLN 70 million.
Founded in 2014, Melvin Capital Management, which is headquartered in New York City, has held positions geared towards a decline in the share price of the Polish video game developer for at least three months. On September 22, 2020, the society informed the Polish Financial Supervision Authority that its short positions on CD Projekt shares exceeded the equivalent of 0.5 percent. company capital.
Since then, the size of this investment by the company, which manages total assets of up to $ 7 billion, has fluctuated strongly. Until October, Melvin expanded it, but on December 10 and 11, i.e. shortly after the premiere of Cyberpunk 2077, he significantly reduced it. It is possible, however, that shortly afterward the management of the society finally decided that the problems with the game would have more serious consequences for the company.
Short selling – what is it?
Melvin was pushing up short again between December 14th and December 22nd. Theoretically, this could be a signal that, according to the company’s specialists, CD Projekt’s shares are still overvalued even after the sell-off so far. Only on Tuesday, December 22, the management of the society briefly sold the company’s shares worth an additional PLN 37 million.
Before we get into the next details, however, it’s worth understanding what Melvin’s short-selling method is all about. To make such a transaction, an investor, usually a hedge fund such as Melvin, must first borrow such shares from another investor (e.g. a large investment company, for which the company receives a remuneration). He then sells them, in the hope that he will later be able to buy them back at a lower price and return them to the entity they borrowed from.
If this is successful, the investor’s return will be the difference between the selling and buying value of the stock. Short selling is usually part of a broader strategy in which the fund manages its investment risk. These positions can counterbalance “long” positions, ie those where the trader “traditionally” benefits from rising stock prices.
What are hedge fund strategies?
According to Wednesday’s closing price, the total value of Melvin’s short positions on CD Projekt shares exceeds PLN 270 million. According to Bartosz Pawłowski, investment director at mBank, who has also managed hedge funds in his career, it is not a big position for this type of investor.
Melvin’s representatives did not respond to our request for comment on the transactions. Bartosz Pawłowski admits that their tone is not favorable from the point of view of CD Projekt stockholders. However, in his opinion, it is better to approach them with caution, because it is difficult to say what the strategy behind them is. According to him, to determine this, it would be necessary to analyze the fund’s entire portfolio.
It may be that the managers have noticed an overvaluation of CD Projekt stock compared to another company in the industry and are playing to narrow the difference in valuations. Perhaps they are betting on a worse performance of CD Projekt shares compared to the Polish WIG20 or European indices. It is also possible that the fund’s algorithms have picked up a signal that often portends weak performance of the rate, and it was decided to use this
comments Bartosz Pawłowski.
How much did Melvin earn from the CD Projekt discount?
According to our calculations , Melvin’s profit on these transactions is roughly PLN 70 million. This is the equivalent of the catalog price for 133 Porsche 911 Carrera. If the investors of the American hedge fund are not fans of the automotive industry, they could buy two luxury apartments, such as a 600-meter apartment at Złota 44, for their profits. that some of the profits would still be distributed.
At least three other large hedge funds tried to earn from the collapse of CD Projekt’s quotations (there may have been more of them, but in the EU reporting changes in short positions is required only when their value exceeds 0.5% of the company’s capital).
These short-sellers, as investors playing under the stock discount are called, were the US investment firms Eminence Capital and Light Street Capital Management. Both probably took positions only in the last few days, which means that the short sale price in their case was close to the one currently on the market.
Not all short sellers made money
Marshall Wace , a London-based company, is also short on CD Projekt stock . However, as shown by our calculations, which are very approximate due to the randomness of data, the British lost several dozen million zlotys in short positions on CD Projekt shares .
The fund first announced that it had taken a short position in October 2018, when the share price did not exceed PLN 200, but we have not been able to determine whether it held it throughout this period. It clearly increased its positions only on December 18 and 22, when the price was slightly below the quotation for most of the session, and according to Wednesday quotations, the value of a short position on CD Projekt shares is over PLN 220 million.
Marshall Wace does not comment on individual positions he occupies. The company manages assets reaching USD 50 billion, of which USD 35 billion. Hedge funds that invest both in the rise and fall of company prices are suitable. Managers use fundamental strategies and strategies based on signals generated by financial models. They treat short selling itself as part of their portfolio management policy . It helps, among others in risk management and market recognition
comments George Trefgarne, president of the PR agency Boscobel and Partners representing Marshall Wace.
What’s next for the CD Projekt course?
Meanwhile, according to Bartosz Pawłowski from mBank, the moves of Melvin’s managers did not have to be driven by the expectations of weak sales results of Cyberpunk 2077. Such a scenario would probably help the fund earn on this position, but it is unlikely to be the main motive.
- It rarely happens that behind such moves there is access to some important information that the general public does not know – explains the specialist.
After Tuesday’s session, the total value of the four funds, calculated for the sell-off of CD Projekt shares, amounted to almost PLN 900 million. However, according to Bartosz Pawłowski, a short sale of shares, even by such strong players, does not have to herald a further decline in the company’s stock.
On the one hand, the valuation of CD Projekt may indeed be perceived as excessive, and this may be a source of exchange rate susceptibility in a situation where the perception of the company by analysts worsens (in one of the recent experts from Bank of America valued the shares at only PLN 100 per share). Hedge funds, on the other hand, can be as wrong as any other investor.
The pressure on the higher valuation of CD Projekt shares is exerted by the fact that there are fewer such companies on the Polish market than, for example, in the USA. The high valuation may be considered to some extent justified, but perhaps funds felt that factors such as downgrading by analysts could be an incentive for a valuation adjustment . On the other hand, it is important to remember that earning money on a stock discount is an extremely difficult task. In the long term, in most cases, profit is brought by investments for the increase in the value of this type of assets, and moreover, short selling is associated with additional costs
concludes Bartosz Pawłowski.